Thursday, July 3, 2008

Short Term Uptrend Above 4105

Yesterday the Nifty had gone up almost 200 points but all those gains were washed away today at one point but finally in the mid afternoon session the Nifty did move up a little. In the end it closed 167 points down from yesterday’s close and only 29 points above Tuesday’s close. A total range of 259 points in 3 days but only 29 points up! Yesterday we had suggested that the Nifty, if it were to cross above its resistance line would go up but the Nifty decided to turn around from there rather than to go up.

Nifty 30 minutes Chart - Trendlines

Attached is the 30 minutes chart of the Nifty which shows the inability of the Nifty to cross its resistance line. According to the dictionary, a trend is defined as the general direction in which something tends to move. With the markets it sometimes becomes difficult to determine whether the prices are moving up or moving down. In the chart attached above one can see that in the last 10 days or so the trend is down since prices are moving down. But what about the last two days? Are we in an uptrend or in a downtrend? Has the trend changed to up? If not, when can we say that the trend has changed? Well, that is why we use trendlines. Trendlines are drawn by connecting two or more successive pivot highs in case of a downtrend and two or more successive pivot lows in case of an uptrend. When the prices breach the trendline, we say that the trend has reversed. But in some cases the trend continues in the same direction but only slows down a bit after crossing the trendline. Which is why we say that a confirmation of a reversal comes only when the price starts making higher highs and higher lows OR lower highs and lower lows, as the case may be.

In the chart above, as far as the trendlines are concerned we will come back into an uptrend if the Nifty were to go above 4040 and in a downtrend if it were to go below 3890. We can see that the Nifty has already made a higher low and as soon as a higher high is made, we will be back in an uptrend. A higher high would be made if the Nifty were to cross 4105, which has changed from 4325 since the most recent pivot high was formed yesterday at 4105. A downtrend would be confirmed if the Nifty were to go below today’s low of 3875, which happens to be the most recent pivot low. As to predicting what will happen, we shall let the market decide what it wants to do. But indications are positive. The Relative Strength Index (RSI) found support at 40 today and reversed from there which is a bullish sign. At the moment the Dow Jones Industrial Average (DJIA) is trading about 75 points higher, crude is trading at about $144, which is off its highs near $145.80. And if Asian markets remain good in the morning, we can expect a positive opening. The only thing that worries me for tomorrow is the inflation figures which will be made public at noon. I’m expecting inflation to increase to around 11.6%. Anything more than that should be negative for the markets.

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